India’s most valuable company, Reliance Industries Limited recently made a strategic announcement about its decision to demerge the company’s oil-to-chemicals (O2C) business into a wholly-owned subsidiary.
In a filing to stock exchanges, the company stated that reorganization would help the company to focus on opportunities across the O2C value chain, as well as improve efficiencies through a self-sustaining capital structure.
Currently Reliance generates 60% of its consolidated revenue from fossil fuels and their by-products ranging from oil to polymers, chemicals, polyesters, and elastomers.
The process of reorganisation of the company’s O2C business into a new subsidiary, is expected to be completed by Q2FY22. According to the proposal, RIL will transfer its refining and petrochemicals businesses along with fuel marketing, (51:49% JV with BP), elastomer business joint venture (74.9:25.1% JV with Sibur), Recron RP Chemicals Malaysia, trading affiliates and all other linked assets to the O2C entity.
For a consideration of $25 billion of long-dated loan, $12 billion in equity and $5 billion of non-current liabilities, the newly created O2C entity will receive $40 billion of long-term assets and $2 billion of net working capital as a transfer from RIL.
The company has already received approvals from stock exchanges and SEBI for the reorganisation and is awaiting approvals from the shareholders, creditors and other regulatory authorities.
Reason for the Reliance O2C spinoff
By creating a separate entity for its 02C business, Reliance will be able to attract global investors who are keen to tap into India’s energy business. In 2019, the Mukesh Ambani led company had announced its plans to sell a 20 percent stake to Saudi oil giant, Aramco in the O2C business at an enterprise value of $75 billion.
Is the Reliance O2C spinoff setting the way for Reliance 2.0?
Well, the answer is yes. Reliance’s O2C business has been the group’s bread and butter till it launched Reliance Jio in 2016 and tasted phenomenal success. Despite severe competition in India’s telecommunications sector, Reliance Jio not only managed to stave off competition but also emerged as one of top players in the segment. While some of the players in the segment chose to merge with others, many had to shut shop due to mounting losses.
Focus on renewable energies
The company has recently made an announcement about making a strategic shift towards renewable energy.
According to a recent report by the Fortune Business Insights the market size for global electric vehicle battery is estimated to touch USD 82.20 billion by 2027 growing exponentially from USD 71.83 billion in 2019.
In a filing to the stock exchanges, the company stated that it intends to further accelerate its new energy and new materials business for clean and green energy development.
The move will not only help Reliance in reducing its carbon footprint but also grab a major pie of the lucrative electric vehicle battery market.
Focus on new age business
By hiving off its o2c business into a separate entity, Reliance can focus more on its new age business such as digital (including Reliance Jio) and retail (Reliance Retail) for driving further growth. RIL currently holds 85.1% stake in Reliance Retail and 67.3 % stake in Jio Platforms. The balance stake in these verticals of Reliance is held by global investors ranging from Facebook, Google, KKR, Silverlake, Mubadala etc.
The clear differentiation of different business verticals indicates the rise of Reliance 2.0 betting on new age businesses with huge potential for growth.
The big question however is, will it unlock more value for the company’s shareholders?
Only time will be able to tell.